Bitcoin and Crypto Taxes for Capital Gains and Income

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Cryptocurrency Taxation Information and Filing with Visor

This week on the BitcoinTaxes podcast, we speak with Jacqueline Mitchell, a tax advisor at Visor. Visor is an online professional tax service specializing in helping young professionals get their taxes done, and are especially knowledgeable in the field of cryptocurrency taxation. Jacqueline shares some of this valuable knowledge with us, from how to treat a crypto donation, to what to do if you receive a 1099-K from an exchange.

Jacqueline Mitchell, a tax advisor with Visor, shares some of her valuable knowledge about cryptocurrency taxation, and how her and the team at Visor can make life a little bit easier for anyone who needs a hand with filing their taxes.

Jacqueline shares her impressive background, and how she began working on cryptocurrency taxation with Visor.[00:30]

Jacqueline: Before Visor, I worked at a Big 4 firm and then a large regional firm. Now, I'm a full time tax accountant with Visor based out of our Atlanta, Georgia office, where we have a team of folks dedicated to working with our clients year-round on their taxes.

So what is Visor, and what sets it apart from other tax preparation services?[01:48]

Jacqueline: Visor was founded in 2016 with the mission of making professional tax services affordable for the mass market. That includes two critical components: getting your taxes filed by a professional, and year-round advice & support, allowing real-time optimization of your filing.

Visor works with a lot of young professionals - that means they are well versed in the crypto space.[02:48]

Jacqueline: We quickly realized that this was an area of expertise that we would have to develop to properly serve this client segment. And of course it helped differentiate ourselves from other possible tax services that hadn't yet adapted to be able to support crypto investments.

It's been fun for us internally because Visor is a fintech company, so we're all tech enthusiasts, and that means we're figuring out how to solve our own issues too. And we get to talk with really interesting clients and provide them an awesome experience.

Jacqueline gives us an overall summary of how cryptocurrency is treated in terms of taxation.[04:35]

Jacqueline: There are two things at play with crypto in the U.S.: The IRS has only issued a small amount of guidance, and the accounting can get messy quickly. We don't yet have the infrastructure that has been developed in other parts of the investment world, meaning you won't necessarily receive an accurate 1099 form or anything else detailing out your tax liability.

Not everyone in the crypto space is a professional day-trader…most crypto traders buy and sell a few different coins and call it a day.[06:53]

Jacqueline: The biggest mistake we've seen from these investors, to be frank, is simply not reporting their crypto activity. While you might think the IRS won't catch you, I wouldn't be so confident. There was a settlement between Coinbase and the IRS in late 2017 that resulted in some names being turned over. Now, more and more entities are issuing 1099-Ks, and when they do that, one copy goes to you and one copy goes to the IRS.

In the beginning of 2018, a major clarification was made about cryptocurrency trades.[10:45]

Jacqueline: The biggest change is around 1031 exchanges, also referred to as like-kind exchanges. The short story is that the new tax law clarified this portion of the tax code, and any ambiguity about its applicability to crypto has been removed. So for 2018 tax returns and going forward, like-kind cannot be applied to crypto.

It's still an open debate as to whether you can apply like-kind in 2017 and earlier tax years. So, if you haven't yet filed or need to amend your tax return because you didn't include your crypto at the time, it's a conversation worth having with your tax advisor.

Now that there's been some official crypto taxation changes, does that mean that more will come in the near future?[13:34]

Jacqueline: I think the IRS will very soon welcome crypto as a form of payment. Actually, on a webinar hosted by the IRS, the hosting agent, said that in the next two years, he believes the IRS will be accepting bitcoin and the like as payment. Even now, Ohio is accepting business tax payments in the form of bitcoin.

2018 was the year of losses for many people…there may be some silver lining, tax-wise.[14:54]

Jacqueline: The short answer is no matter whether you gained or lost on crypto investments, you should report those investment on your taxes. It would be advantageous to report your losses. Up to $3,000 can be deducted against your other income - it will at least lower your tax bill. Don't let those losses go entirely to waste.

On the topic of losses - what about loss harvesting?[16:10]

Jacqueline: It's certainly allowed, although there are some caveats that should be considered. Of course, you need to weigh those caveats against the total size of the loss that you would be able to incur and any trading costs to determine whether it's worth doing.

A lot of people have extra income from hard forks and air drops - how these are taxed depend on how you treat them.[17:57]

Jacqueline: While forks and airdrops are not explicitly mentioned in the IRS issued guidance, the most reasonable approach is to report the fair market value of the cryptocurrency received in the fork as additional income. This approach is consistent with the well-established tax law that income is taxable at the time when you take possession of the income.

The key factor here is the timing of when you took possession. It's the value of the new coin at that date that you'll likely want to use to determine how much income to report, and what your corresponding basis starting point is for that new asset

Jacqueline discusses the relationship between cryptocurrency taxation and international tax laws.[21:10]

Jacqueline: There is a requirement that foreign bank accounts must be reported to the IRS. The IRS has defined foreign bank accounts very broadly, such that it includes much more than just traditional bank accounts.

They haven't clarified whether crypto holdings in foreign exchanges fall under this definition, so I can't say definitively whether you must file the FBAR form, which is the foreign bank account reporting form.

What I can say is there's very little reason not to file that form from a risk reward perspective. There's no tax associated with it. So the only real downside is the effort of having to fill it out. However, not filling it out could result in steep fines if penalized by the IRS. So, we recommend to our clients to complete the form.

It always feels good to help others - and there may be some tax benefits to donating crypto.[25:18]

Jacqueline: Any unrealized capital gain is avoided by donating the crypto asset, which wouldn't be the case if you first exchanged the asset to cash and donated cash. Also, just like with cash donations, you get a charitable deduction on your tax return just as if you donated cash.

It's crucial to calculate all of your trading data to yield accurate gains/losses. However, sometimes, accessing all your trading data is impossible. Especially if an exchange has shut down.[26:29]

Jacqueline: Use the most reasonable method that you can support and report the income and losses. Keep and provide the best records and documents that you can, and be ready to provide these records and documentation if ever requested.

If you are having trouble with this, talk to a tax advisor and explain what records you do have and what you can remember. They can help you weigh your options and figure out the best way to file as accurately as possible.

The team at Visor is available to help with these unique crypto tax situations.[28:43]

Jacqueline: It's very easy to get started. Visor operates entirely online, so you start by creating an account, and at that point you have the ability to start messaging with our team through our online portal. Of course, we also offer phone calls so you can speak with your tax advisor as much as needed. Plus, our mobile apps are being launched shortly.

There's a link on Bitcoin.tax's homepage that directs to a special deal, $25 off, for Bitcoin.tax users. So make sure to sign up there if you are interested in working with Visor. There's no cost to getting started and creating an account, so don't hesitate to check it out.

Tax prep isn't just for the day before taxes are due - take control and plan your taxes throughout the year[29:55]

Jacqueline: We are available year-round. That's both for audit protection and for advice.

The more typical reason for communicating with our clients during the year is for advice. Whether it's things like open enrollment at work and your trying to figure out what an HSA or FSA is or if something's changed in your life or if you just have a question, you can ping your tax team anytime.

Jacqueline: You can connect your account within Bitcoin.Tax to our Visor account in Bitcoin.Tax. That functionality allows us to view your account within bitcoin.tax, assuming you want us to have that access. We can help work out any tax questions that come up while updating your info for the year, then pull the reports over to Visor to include in your overall tax filing.

Bitcoin.tax handles more complex situations as well, such as mining income and more. In those cases, we might be reporting self-employment income, which goes on Schedule C. If you have expenses associated with that income, then we can deduct it. So we'd ask you to provide those numbers directly to us to include on the tax return.

If you are already using Bitcoin.tax, there's very little that you need to do in order to get set up with Visor.[32:57]

Jacqueline: As you're aware, it doesn't take many transactions for it to quickly get complicated. Even if you only owned bitcoin, you might have received new coins from forks, such as Bitcoin Cash, and that all needs to be tracked.

That's why a service like Bitcoin.tax plays such a key role in this space. Piecing all the transactions together is basically impossible to do without really good software. So almost all our clients that invest in crypto need to utilize Bitcoin.tax to provide the consolidated reports (such as the 8949) that can then be used to prepare your tax return.

Exchanges are sending out 1099-K forms, and the reported figures can sometimes cause people to panic.[34:08]

Jacqueline: Some exchanges are issuing 1099-Ks that show the gross amount of transactions processed on their exchange, if it exceeds $20,000. This is similar to something that a service like PayPal will do too.

If they don't strip out trading fees, then the gross proceeds reported on the 1099K will exceed the gross proceeds reported from Bitcoin.tax. The Bitcoin.tax calculation is the correct one, and the more favorable one for your tax return calculation.

Jacqueline: Keep calm and know the IRS isn't "out to get you". Make your best effort to report transactions as faithfully as you can and you'll be fine.

If you enjoyed our podcast, be sure to check back frequently for more great discussions about cryptocurrency taxation. If you have any questions for Jacqueline Mitchell and her team, or want to sign up for Visor's extremely helpful service, you can head over to visor.com, or use this link to receive $25 off each return: https://bitcoin.tax/visor.

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